How to get better loans and improve your financial position
San Diego Dental Accountant
September 30, 2015
Ken Rubin, CPA/PFS
Knowledge is power when it comes to getting great loans in the dental industry. Your knowledge level will directly affect not only your eligibility for obtaining loans, but will also have an impact on your interest rate, prepayment penalty, and other important loan terms.
Lenders absolutely love dentists because dentists have such an incredibly low loan default rate-less than 1%. In contrast, more than 90% of all new businesses fail within their first 10 years. Absolutely nothing is more important to a lender than being assured that the loan will be repaid. This is the lender’s number one criterion for making a loan. This is why so many lenders are courting dentists so heavily and have set up loan divisions exclusively for dentists. If fully informed, dentists can be-and should be-in the driver’s seat when shopping for a loan.
There are four main types of loans available to dentists: (1) Practice acquisition loans, (2) equipment purchase and tenant improvement loans, (3) debt consolidation/refinance loans, and (4) real estate loans. Let’s look at practice acquisition loans closer to learn more about the process.
Because it is common in the dental industry for dental lenders to make practice acquisition loans for 100% of the purchase price (which means the buyer does not need to come up with any money for a down payment and the seller does not need to carry back a promissory note on the sale), dentists have developed a false belief that the value of a dental practice is the maximum amount that a dental-specific lender will lend to a potential buyer. Interestingly enough, the amount a lender will lend is in fact highly dependent on the particular buyer. A practice may be worth, say, only $500,000, but a lender might lend $600,000 or more (excluding any additional working capital funds) if it is extremely confident that their loan will be repaid even if the dentist fails. How could this be? The lender, for example, may feel comfortable making a loan for more than 100% of the practice value if the borrower and/or co-borrower or guarantor has significant assets or earnings in addition to the dental practice that is being purchased.
On the flip side, it is not uncommon for a lender to make a practice acquisition loan for less than 100% of the practice value. This is due to a perceived risk of the borrower defaulting. The most obvious reason for perceived risk is a buyer’s past or present financial problems. Lenders are fully aware that history has a funny way of repeating itself. In addition, lenders become aware of differences between the buyer and seller that could cause practice numbers to go down. In other words, not every buyer is a good match for every practice. Compared to the seller, the buyer may not have the speed, diversified procedure abilities, business acumen, or similar ability to convince patients to accept treatment plans.
Dentists can dramatically increase their chances of getting a loan if they understand in advance the approval criteria of the lender’s underwriting department (credit score, amount of savings, debt to income coverage ratios, etc.). Knowing these factors, dentists then can strategically and proactively maneuver in order to meet those requirements. For example, lenders generally don’t include qualified retirement plan assets (IRAs, profit sharing plans, 401(k)s, etc.) as “savings” when calculating eligibility. Armed with this information, I have assisted several dentists in qualifying for loans that they would otherwise be unable to qualify for by making one slight tweak to their finances. Why does this problem come up in the first place? Generally, it is conventional wisdom for a dentist to fund as much money as possible into a qualified retirement plan. If there are no savings left over after funding an annual qualified retirement plan and paying income taxes every year, a dentist could have difficulty obtaining a practice acquisition loan, especially if it is a large loan amount. Strategically and proactively switching the funding for a year or two (depending on the annual retirement plan contribution amount) from a qualified retirement account into a regular savings account or brokerage account will generally enable a dentist to meet the underwriting department’s often rigid criteria.
Lenders hate credit card debt and back taxes. Most dentists are unaware that most dental-specific lenders have a $50,000 (or more) rapid, no-application loan available to them as long as they don’t have any major credit problems. Many times I have helped clients take advantage of one of these rapid, no-application loans to pay off credit card debt or back taxes so they could meet the lender underwriting department’s approval criteria for dramatically bigger loans.
Let’s address another problem I often see. Some lenders will drag the loan approval process along for a long time, and then at the 11th hour will tell you they either cannot give you the low interest rate you are expecting, or they tell you they cannot do the loan at all. “Double packaging” your loan application will keep you in the driver’s seat and protect you from having to suffer bad news at the 11th hour. Double packaging loans means submitting loan applications with two or more lenders simultaneously. By doing this, you can quickly and easily close on a loan with a different lender rather than being held hostage at a high interest rate, or finding yourself stranded with no immediate loan available.
Here’s another tip for getting a loan approval: Use of persuasive and compelling written explanations will increase likelihood of securing the loan. Underwriters need something they can place in their files to support your verbal statements. For example, explain why a prolonged dip was just temporary due to nonrecurring health problems or injury.
Now let’s talk about the different kinds of lenders out there. Not only is there a big difference between lenders, but their positions in the marketplace frequently change, too. The best lender yesterday might not be the best lender today. Why is this? It’s because each bank’s current policy depends on several changing factors. For example, in order to gain market share, one lender will loosen up their underwriting credit policies for a period of time. The marketplace of dental industry advisors who are “in the know,” like myself, will shift business to them during their period of leniency. Gravity can only be defied for so long, however, and eventually their period of credit underwriting leniency will catch up to them, and then they will experience an abnormally high rate of defaults. The high rate of defaults will cause them to significantly tighten up their credit underwriting policies. Because they usually overreact with a huge swing, they then fall out of favor among dental advisors.
Occasionally, lenders will present a phenomenal opportunity for dentists to build wealth. Every couple of years, a new bank decides to enter the dental lending business and make their debut in a very aggressive manner. They will attempt to build their market share by temporarily offering a shockingly low interest rate, which may be at least a full 2% lower than the lowest dental lender interest rate currently available.
I have generally found that when these programs pop up, they can be problematic because the new lender and their underwriting departments are not familiar with dental practices and the way the lending industry for dental practice acquisition loans works. However, these aggressive new players that want to enter into the dental world can provide very rare and huge opportunities for dentists to save staggering amounts of money by taking advantage of their loan refinance and/or debt consolidation programs. When these programs do pop up, I proactively go through my CPA firm’s client list and determine who can benefit. Taking advantage of these programs and shifting a client from one lender to another will often save a client more than $100,000 in future interest payments.
In summary, lending is a game with rules and strategies involved. The more informed you and your advisors are, the better the result will be that you will achieve and enjoy!
You can also find the full article at: DentalEconomics.com.